The Marijuana Industry: Where the Only the Rich Survive

By: Steven Hobbs – Hofstra Law School – Law Student Contributor

Over the past decade, marijuana has caused a great deal of controversy among the states.  Since California was the first state to legalize medicinal marijuana in 1996, many states have followed suit.  As of today, 23 states and the District of Colombia have legalized the use of medical marijuana with 4 of those states allowing for recreational use of marijuana as well.  With the acceptance of marijuana among a growing number of states marijuana has grown into an industry like no other.  The revenue generated from marijuana over the years has been astronomical.  Reports have stated that by 2019,  “all of the state-legal marijuana markets combined will make for a potential overall market worth almost $11 billion annually.”[1]  Although nearly half the states have disembarked the prohibition on marijuana, many other issues still arise inhibiting the industry from becoming a profitable.  One aspect that has been overlooked is how the current laws in the industry are allowing the few and powerful to fully take control of this blossoming multi-billion dollar industry.

Under federal law, marijuana is classified as a schedule 1 drug.  Schedule 1 drugs are considered the most dangerous with the drugs seen as having no accepted medical use and have a high potential for abuse.[2]  Since marijuana is conflicted between the federal government and several state governments, the Attorney General issued the “Cole Memorandum.”  The Cole Memorandum, which applies nationwide, states 8 priorities federal prosecutors must consider when considering prosecution under the Controlled Substance Act.[3]  Many have viewed this as the federal government taking a relaxed approach when dealing with the marijuana industry.

Even though the Attorney General issued the Cole Memorandum, the federal government still uses means to prevent the growth of the marijuana industry.  One major hurdle owners of marijuana dispensaries and groweries face are high tax penalties from a statute over 30 years old.  In 1982, Congress passed §280(e) of the tax code, which deals with businesses “trafficking in controlled substances” prohibited by federal law.[4]   Under this section, even criminal income must be reported to the IRS.

At its face it seems reasonable for a marijuana shop owner to report their income like any other company.  However, companies that deal with marijuana are prohibited from taking tax deductions that are typically available for other business owners.  Essentially, a marijuana business owner will have to pay a tax rate of 70%, which is drastically different from a 30% tax rate for any other business owner.  Where any business can have expenses such as travel, phone-call and packaging considered as tax write-offs, owners in the marijuana industry cannot.  An example of this is a marijuana dispensary in Colorado (Allgreens) took in $1.7 million (before expenses) in 2014 only to get a bill from the IRS for $866,000.[5]

In 2015 (first year of legal sales), Colorado was estimated at selling upwards of 1 billion in marijuana sales, earning the state $135 million in taxes on marijuana.  Similarly, Washington is estimated to earn the state $1 billion in tax earning for the sale of marijuana from the years 2015-2019.[6]  Despite it being illegal federally, the federal government still wants to get a piece of money that the states are reeling in.

In order to stay afloat, businesses dealing with marijuana have to think outside the box with their taxes that is causing them financial issues.  Companies have been trying to deduct any expenses of their business that is not related to marijuana.  An example, if a dispensary also performs care-giving services, the dispensary can try and get the care-giving expenses deducted. [7] However, in order to do for a marijuana shop owner to do this, record keeping has to be extensively detailed.  Recently, the IRS has issued guidance (ILM 201504011) on this very issue.[8]  The guidance issued is extremely complex and still makes it difficult for marijuana shop owners to full understand what is deductible or not.

Another area of the marijuana industry that creates an unequal playing field comes from how new this industry is.  The reason this causes an unequal playing field because it allows for the wealthy to lobby for legislation that will benefit themselves.  A perfect example of this comes from the constitutional amendment vote Ohio had in November 2015.  In early November 2015, Ohio citizens were given the opportunity to vote on a constitutional amendment for their state that would legalize marijuana (both medical and recreational).  At the votes conclusion, prohibition on marijuana continued with a pass of “roughly two ‘No’ votes for every ‘Yes.’”[9]   However, the issue that voters had with the amendment was not regarding the legalization aspect, but rather the “de facto” monopoly by only allowing for 10 officially licensed grow sites.[10]  Opponents of the law felt that the amendment “would create a ten person “pot grower oligarchy” by limiting the commercial marijuana cultivation to only these 10 sites.  They claim “issue 3 was designed and built primarily to garner massive and exclusive profits for a small group of self-selected wealthy investors.”[11]

“ResponsibleOhio,” is the ad-hoc group, created by political consultant Ian James, that was behind the backing of the Constitutional amendment change in Ohio.[12]  In order to back the amendment, James “wrangled together investors willing to bankroll a $20 million campaign, sink in an additional $20 million to buy the land and $300 million more to build the facilities.”[13]   Many of the investors that James “wrangled up” include many wealth individuals such as Nick Lachey (singer) and Oscar Robertson (NBA player). [14]  Being that the campaign required significant financial contributions, only the wealthy of Ohio had a legitimate opportunity to the state license.

In conclusion, it seems that the marijuana industry is an industry that has not even come close to reaching its full potential.  For many, this is as good as any reason to get involved in the industry.  However, this greed for control of the industry has caused the wealthy be a few steps ahead of the game.  In order to stay in business, all marijuana companies must throw significant cost to comply with the laws.  In most cases the cost become too burdensome.  Others who have significant cash flow can ultimately take the loss and hope for changes to be made with the upcoming presidential election.

[1] Matt Ferner, Legal Marijuana Is The Fastest-Growing Industry In The U.S.: Report, Huffington Post, (Jan. 28, 2015) http://www.huffingtonpost.com/2015/01/26/marijuana-industry-fastest-growing_n_6540166.html.

[2] Id.

[3] Memorandum from James M. Cole, Deputy Attorney General, Guidance Regarding Marijuana Enforcement (Aug. 29, 2013).

[4] Feds Slap 70% Tax on Legal Marijuana Businesses, The Daily Beast (Feb. 18, 2016) http://www.thedailybeast.com/articles/2016/02/18/feds-slap-70-tax-on-legal-marijuana-businesses.html.

[5] Jack Healy, Legal Marijuana Faces Another Federal Hurdle: Taxes, NY Times (May 9, 2015) http://www.nytimes.com/2015/05/10/us/politics/legal-marijuana-faces-another-federal-hurdle-taxes.html?_r=0.

[6] Supra, note 2.

[7] Robert W. Wood, IRS Advice On Marijuana: Deduct It . . . But Prepare For 50% Tax, Forbes (Jan. 24, 2015) http://www.forbes.com/sites/robertwood/2015/01/24/irs-advice-to-marijuana-dealers-dude-deduct-it-but-prepare-for-50-tax/#57b6493d7589.

[8] Id.

[9] Greg Zeman, Ohio Says ‘No’ To Legal Weed Monopoly, CannabisNow (Nov. 4, 2015) http://cannabisnowmagazine.com/current-events/politics/ohio-says-oh-hell-no-to-legal-weed-monopoly.

[10] Id.

[11] Ohio Voters Reject Nick Lachey-Backed Legal Marijuana Proposal, New York Post (Nov. 4, 2015) http://nypost.com/2015/11/04/ohio-voters-reject-nick-lachey-backed-legal-marijuana-proposal/.

[12] David Bienenstock, Ohio’s Legal Weed Proposal Could Create The World’s first ‘Pot Grower Oligarchy,’ Vice News (Aug. 16, 2015) https://news.vice.com/article/ohios-legal-weed-proposal-could-create-the-worlds-first-pot-grower-oligarchy.

[13] Id.

[14] Supra, note 7.

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